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Corporate taxes and the state’s fiscal crisis

A coalition of community, labor and religious groups will hold a press conference at 9 a.m., on Friday, September 27 at the Thompson Center press room and march over to the Bilandic Building, 160 N. LaSalle, to a House Revenue Committee hearing on the Illinois Corporate Responsibility and Tax Disclosure Act.

 

Illinois is in fiscal free-fall, but our political leaders seem incapable of addressing a structural deficit created by our regressive tax system.

The state’s crisis threaten to swamp the budgets of cities and school districts as well as funding for human services and health care, but “the only solutions that are ever discussed are deeper and deeper cuts,” said Kristi Sanford of Northside POWER, part of a statewide coalition pushing for corporate tax accountability.  “But these cuts just hurt Illinois families and the state’s economy — and no amount of cuts can solve the problem.”

Meanwhile Springfield is leaving serious money on the table:  two-thirds of corporations operating in Illinois paid no state income tax in 2010, according to the Illinois Department of Revenue.

According to the Governor’s Office of Management and Budget, 80 percent of state revenues come from individual income tax and sales tax receipts; only 9 percent comes from corporate income taxes.

Corporations reporting billions in profits are estimated to have paid no state income tax.

We don’t know what individual corporations are paying, but major Illinois-based corporations — with massive profits — paid no federal income tax from 2008 to 2010 (in some cases receiving huge tax subsidies instead), according to Citizens for Tax Justice.

Who’s not paying?

And since state taxes track federal taxes, advocates say we can probably assume no Illinois income taxes were paid over those years by Boeing, with $14 billion in profits; Baxter International, with $1.3 billion in profits; Integrys Energy Group, with nearly $1.18 billion in profits; and Navistar International, with $1.1 billion in profits.

The problem is that for too long, corporations have entirely dominated tax policy debates, according to Dan Bucks, former director of revenue Montana, who advocates for corporate tax accountability measures.  He backs a measure now under consideration here to encourage greater public participation by requiring large publicly-traded corporations operating in Illinois to disclose their state income tax payments.

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Alternatives to school cuts

Just a month ago — when they were intent on closing 50 schools — the watchword at CPS was “quality education.”

“What we must do is ensure that the resources that some kids get, all kids get,” said Barbara Byrd-Bennett in an internet ad funded by the right-wing Walton Family Foundation.  “And these resources include libraries and access to technology and science labs and art classrooms….

“And with our consolidations we’re able to guarantee that our children will get what they need and what they deserve.”

That was then.

Raise Your Hand has released a very partial list of budget cuts faced by schools under the district’s new per-pupil funding system, and it’s impressive:

Goethe, Jamieson, Kozmisky, Sutherland, each will lose between $250,000 and $300,000.  Audobon, Belden, Gale, Grimes Fleming, and Ray, between $400,000 and $500,000.  Bell, Darwin Mitchell, Murphy, Suder, Sullivan High, betweeen $700,000 and $800,000.  Gage Park High, Lincoln Park High, Mather Elementary, Roosevelt High, $1 million or thereabouts.  Foreman High, $1.7 million.

CTU reports that Taft High School faces a $3 million cut.

According to Wendy Katten of RYH, every school they’ve contacted faces budget cuts.  So far they have figures from about 10 percent of CPS schools, and the cuts total about $45 million, she said.  (CTU budget analyst Kurt Hilgendorf said the union has requested district-wide figures on cuts but CPS has declined to supply them.)

“It’s horrific,” she said.  “There are terrible losses.”

It also clearly contravene’s Byrd-Bennett’s promise about what school consolidations would accomplish.

Losing library access

Two high schools,Von Steuben and Lincoln Park,  are reported to be considering laying off librarians — at Von Steuben it would mean no open-access library; at Lincoln Park, the library would remain open part of the school day but not after school — but many more principals are being forced to choose between staffing their libraries and having enough teachers.

At many schools it will mean  eliminating art or music.  At Katten’s son’s school, it looks like art will be eliminated and physical education will be staffed by a part-time teacher — which means gym just twice a week, far below the state requirement.

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Violence prevention: Corporate charity or citizenship?

Last year, community groups called on Mayor Emanuel and the business community to match the fundraising they did for the NATO Summit to fund youth programs in the neighborhoods.

Now, under the glare of national publicity for Chicago’s ongoing epidemic of violence, Emanuel has decided to deploy his famous fundraising skills to gather $50 million in corporate donations for violence prevention programs over the next five years.

Certainly, every effort to bring resources to desperate communities is welcome.  (And it’s churlish to point out that these folks raised nearly $50 million for NATO in a few weeks.) But is charity a substitute for good citizenship?

The Grassroots Collaborative is pointing out that Emanuel’s choice to co-chair the campaign heads a company that is profiting from controversial interest rate swaps that cost the city and the schools tens of millions of dollars a year.

Jim Reynolds is CEO of Loop Capital, which according to GC, has made $100 million in five interest rate swap deals with the city and CPS since 2005.

Interest rate swaps — also called “toxic rate swaps” by critics — are one of the wonderfully innovative financial products developed in the run-up to the financial crash a few years ago.  They provide set interest rates to cover variable returns on public bond deals.

Cost Chicago $72 million a year

But since the crash, the Fed has kept interest rates near zero, while local governments are locked into interest rates of 3 to 6 percent.  That costs Chicago $72 million a year; CPS loses $35 million a year on the deals, according to GC. (CTU has protested this arrangement.)

While applauding their “charity work,” GC notes, “Chicago business leader must address their role in creating the lack of resources for youth and communities in the first place.  They must stop gouging taxpayers and renegotiate these toxic deals.”

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Protest to target River Point, LaSalle Central TIF

The news that the LaSalle Central TIF district took in no new revenue last year adds urgency to the demand of community groups that the TIF be shut down, said Eric Tellez of the Grassroots Collaborative.

On Tuesday, community activists will protest the newest LaSalle Central TIF subsidy, $30 million going to finance a plaza inside the planned River Point office development at Lake and Canal.

Starting at 11 a.m. (Tuesday, August 7), they’ll march from Merchandise Mart to the LaSalle Street district for a press conference and rally, and they’ll leaflet at a business owned by one of River Point’s developers.

They say “giving property tax dollars to wealthy developers to build in prosperous areas is not an effective strategy” for economic development – especially when basic services are being cut in the city’s neighborhoods.

In July, the annual TIF report from County Clerk David Orr revealed that annual TIF revenue in Cook County has declined 18 percent since the housing crash in 2007, and that LaSalle Central was among nine TIF districts with no revenue last year.

If that trend were to continue, the city could be forced to transfer funds from other TIF districts to pay for existing commitments downtown.  LaSalle Central TIF agreements involve multimillion-dollar subsidies to corporations including Miller-Coors, Ziegler Co., Accretive Health Inc., NAVTEQ, and United Airlines, which is collecting a $24 million handout.

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In Springfield, no solutions

Sad to say, nothing they’re doing or talking about in the General Assembly will have a significant impact on the state’s chronic budget crisis.

Not draconian Medicaid cuts, not possible pension cuts or casino expansions.  The legislature is barking up the wrong trees, and doing it over and over.

That’s because the state doesn’t have a spending problem.  In real terms, Illinois has been steadily cutting spending on education, human services, health care, and public safety for the past decade.  Medicaid is not the problem: general revenue funds going to Medicaid are down over the past five years.

According to Ron Baiman of the Center for Tax and Budget Accountability, Illinois is one of the nation’s wealthier states, looking at the state’s gross domestic product per capita.  But it has been one of the nation’s lowest-spending states, looking at state spending as a percentage of GDP.

So the problem isn’t overspending, and cutting doesn’t get us closer to a solution. The problem is a regressive tax system that doesn’t tax where the money is.

Regressive

Illinois has one of the most regressive tax structures in the nation.  As noted here last year, the bottom 20 percent of households pays twice as much of their income in state and local taxes as the top 20 percent does.

Even the flat income tax is regressive, since it imports all the federal tax code’s loopholes; of the current nominal rate of 5 percent, households earning over $1 million a year pay an effective tax rate of just 2.1 percent – the same as households earning over $10,000.  The squeeze is on the middle.

And especially with the surge of income inequality in recent decades, that means the state asks more and more from people who are doing less and less well, and fails to capture the gains of economic growth, which are increasingly found at the top.

It can’t go on forever.  At some point Illinois leaders are going to realize there’s no alternative to a progressive income tax.  The constitution, which mandates a flat tax, will have to be amended.

All our neighboring states have progressive systems – and that’s the reason their budget problems are so much less than ours.  If we took Iowa’s income tax rates and applied them to Illinois’s tax base, we’d raise $6 billion more a year – and 54 percent of taxpayers would get a tax cut averaging 24 percent, according to CTBA.  If we took Wisconsin’s we’d raise $3.6 billion more a year and cut taxes for more than half our residents.

Tax cut

The Illinois constitutional amendment will have a straightforward appeal: nearly all taxpayers’ rates will go down.

CTBA has fashioned a proposal for a progressive tax system for Illinois that raises an additional $2.4 billion yearly (even after allowing for increased tax avoidance by wealthy taxpayers) and reduces the tax rate for 94 percent of taxpayers.

Everyone earning under $150,000 would get a tax cut.  Starting to sound good?

It’s not even very tough on the wealthy; CTBA figures the effective tax rate (after deductions, credits and offsets) would top out at 6.3 percent for those earning over a half million a year.

There’s other money the legislature is leaving on the table, as it cuts public services to the bone.  A restructuring of the corporate income tax in 2001 – an unsuccessful attempt to encourage job growth — means most Illinois corporations pay no income taxes.

And an antiquated sales tax which applies to goods but not services – so if you buy a lawnmower and gas to mow your own lawn, you pay a sales tax, but if you hire a lawn service you don’t – costs the state between $500 million and $1 billion a year.

Corporate welfare

Then there’s corporate welfare – an area in which Illinois is a leader.  The Responsible Budget Coalition identified six corporate tax loopholes which don’t make economic sense — and where Illinois departs from federal policies and practices in other states — costing Illinois nearly $700 million a year.

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Austerity in Chicago

As European voters increasingly reject the austerity program, community leaders here are proposing alternatives to Mayor Emanuel’s agenda of spending cuts and privatization– an approach they say hurts working families and stifles economic recovery.

“We are saying there are ways of looking at budget- and policy-making other than just cut, cut, cut,” said Michael Bennett, a sociology professor at DePaul University, one of the coordinators of a group of local activists and scholars meeting this weekend to develop a local public policy agenda “that gives priority to social justice, balanced community development, and responsible fiscal management.”

The Chicago Equity and Fiscal Policy Initiative will release working papers on the city budget, schools, community and the environment, and economic development and jobs, at a gathering with the theme Act Locally Chicago this Saturday, May 19, 10 a.m. to 1 p.m. at Erie Neighborhood House, 1347 W. Erie.

“We have to focus just as much on neighborhoods as we do on downtown,” Bennett said. “It has not been balanced.”

The working papers and policy recommendations are aimed at starting a conversation, he said. One of their goals is to maintain public services that are threatened by privatization. They’ll talk about reallocating existing resources more fairly, and about longer-term solutions to raise revenues more sustainably.

Devastating

Their initiative reflects concerns that are widespread among community organizations.

“What’s happening under Mayor Emanuel is a microcosm of what’s happening around the world,” said Amisha Patel of the Grassroots Collaborative, a citywide coalition of labor and community organizations.

“Politicians are pushing austerity, saying the government has to cut spending, but it’s really devastating to the local economy and to people’s lives,” she said. “It’s the worst thing we can do in economically challenging times. For the economy to have a chance we have to invest in the public sector and public services.

“When you cut resources going to low-income families, you hurt the people who put money back into the economy most directly, she said. “And you end up paying through the back end: when you cut mental health services, it costs you more in hospitalizations, in incarceration.”

The city continues to “move resources out of the neighborhoods and into downtown,” she said, pointing to a $29-million city subsidy for a new office building in the West Loop announced this week.

Regressive

Emanuel has cut taxes on corporations (where profit levels are at record highs) while “focusing on revenue generation that saps working families – quadrupling water fees, installing speed cameras, higher fees and fines,” she said. “We’ve got to have revenue solutions that don’t hurt working families.”

Chicago’s fiscal crisis is compounded by several factors, said Ron Baiman of the Center for Tax and Budget Accountability. Locked in political stalemate, the federal government is cutting domestic spending, and the state’s budget crisis is exacerbated by a constitutional provision mandating a flat-rate income tax. (On top of that, Illinois is one of the top states for corporate subsidies.)

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North Side voters back financial tax

By a wide margin, North Side residents backed a referendum calling for a sales tax on financial transactions Tuesday.

Voters in 17 precincts in the 46th Ward voted 3-to-1 in favor of “policies to tax speculative financial transactions including, but not limited to, derivatives and futures contracts.”

A one dollar per contract sales tax on trades on the Chicago Mercantile Exchange, which have an average value of $230,000, could generate $6 billion dollars a year for the state or city, according to Northside Action for Justice, which backed the referendum.

The group sponsored the referendum because “politicians have not been taking this seriously,” said Kelate Gaim of Northside Action in a release.

“Why do I pay more sales tax when I buy a pair of shoes than these traders do placing speculative bets?” asked Francis Tobin, the group’s chair. The financial transaction tax would be borne by individual traders, not by exchanges.

By a similar margin, voters in those precincts also backed a TIF reform proposal calling for returning surpluses to schools and other taxing bodies, and restricting future TIF spending to affordable housing, living wage jobs and businesses, and youth and senior services.

What corporate tax loopholes cost Illinois

With Governor Quinn set to call for major Medicaid cuts Wednesday, a new report says Illinois is losing hundreds of millions of dollars a year through corporate tax loopholes that other states have closed.

Indeed, Illinois leads the nation in revenue lost through several of the tax breaks, according to a report from Good Jobs First and Make Wall Street Pay Illinois.

The biggest loophole is the accelerated depreciation deduction, which costs the state more than $1 billion over three years – far more than any other state, according to the report.

The Illinois deduction is based on a tax break granted by the federal government, designed to encourage capital investment by allowing companies to write off new equipment immediately rather than over its expected lifespan.  Most states have “decoupled” from the federal measure.

“Forgoing revenue in the short term to help stimulate the economy is possible for the federal government because it is allowed to run a deficit,” according to the report.  “But for the states, with their balanced-budget requirements, such revenue loss during a recession would only force deeper budget cuts.”

Small businesses are covered by a separate deduction and wouldn’t be affected by decoupling, the groups say.  Decoupling from the accelerated depreciation deduction has been advocated by the Center for Tax and Budget Accountability (see Newstips from 2008 and 2011).

A break for Wal-Mart

Illinois could bring in $115 million a year by eliminating the sales tax “vendor discount,” a relic of the pre-computer age that gives retailers a portion of sales tax revenues to cover handling costs.  The groups estimate that Wal-Mart took in nearly $10 million from sales taxes paid by Illinois shoppers last year.

The state loses at least $63 million a year by using the single sales factor, which eliminates corporations’ taxable property and payroll share as factors in figuring income tax bills, instead using only their in-state sales.  Large manufacturers lobbied for the loophole, arguing it would create manufacturing jobs.  It hasn’t.

The formula can reduce the tax rate of Illinois-based corporations with significant production, payrolls, and property holdings here  but mostly out-of-state sales by 80 or 90 percent.

“We expect that the governor and general assembly will adopt a budget that protects revenue sources and provides for the educational, health care and infrastructure needs of the people of Illinois,” said Rev. Maggie Pagan-Banks of A Just Harvest, part of Make Wall Street Pay. “While the state is struggling to meet critical obligations to its citizens, it cannot afford to simultaneously subsidize corporate profits.”

At Clawback,Greg LeRoy of Good Jobs First, the report’s co-author, highlights recent layoffs at Sears’ Hoffman Estate headquarters – announced weeks after a $275 million property and income tax break designed to keep Sears here – calling it “the latest evidence that unaccountable tax breaks fail to promote investment for job creation.”



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